Security tokens are about to revolutionize how capital is raised for companies, VCs, and real estate funds; and Venture360 is excited to bring this new technology to companies and investors around the world. In this post, we are going to talk about why utilizing the latest technology to tokenize securities is so game-changing, and how you can be part of the revolution.

What are Security Tokens?

If you’re having a hard time understanding why blockchain and decentralized transactions are paramount to the future of finance, give this a read. Not only will blockchain revolutionize the banking industry, but it will create a digital ledger where transactions in cryptocurrency (i.e. Bitcoin, Ethereum, etc.) are stored in chronological order on a public domain.

Blockchain allows for the creation of cryptocurrencies, aka tokens, which have three primary functions:

1. Payment Tokens—used as a form of currency or payment such as:

Recurring subscriptions

Apple Pay/Android Pay

2. Utility Tokens—used to allow access to a service or application such as:

Permission to use a private network

Right to vote on an issue or proposal

3. Security Tokens—used as a digital asset which falls under federal security regulations such as:

These tokens represent a security or financial interest such as ownership in company stock.

If you can own it, you can tokenize it.

Since we’re talking about security tokens specifically, let’s break that definition down a little further. Simply put, a security token is essentially the ability to tokenize an asset. The value of the token is determined by the item it represents—in this case, the value of the company you own stock in.

There are many benefits to tokenizing private securities. As the game stands today, an investor’s portfolio is comprised of ownership in many different companies for which they most likely paid cash. The gains on those investments have yet to be realized because there is no easy and secure way to sell these securities.

They’re locked into that investment for an indefinite amount of time with no concrete way to visualize how it’s performing. Company cap tables are unreliable and often not kept up to date. Not to mention, the CEO is busy and probably forgot to send the last few investor updates.

Section 1

Why Tokenize?

This brings us to the heart of the matter. Why should companies tokenize their securities?

Cap Table Manages Themselves

Ready for a bold-faced lie you’ve been living with? Cap tables don’t have to be managed.

Cap tables are a record of transactions, so if you process those transactions on say the blockchain and issue tokens—Boom! Cap tables are easily and securely done.

This isn’t a Trend

If anything, this market is going to continue to grow. Many leading experts predict that a significant shift from utility tokens to security tokens will take place in 2018. Why? Primarily due to compliance and regulations. While initially, companies were hesitant to offer tokenized securities due to concerns over violating SEC regulations, those apprehensions are rapidly dissipating.

The future of securitized tokens is on the rise as we start to see regulation-compliant platforms like Venture360 provide the tools necessary to make security tokens a legitimate alternative.

Transparency

Each and every transfer done on a platform using tokenized securities must go through a ledger on the blockchain. This means that all transactions are documented and visible to anyone with approved access. Now, both the company and the investor have real-time access to the same information. This is undisputed, entirely accurate information. All the time. That’s huge.

Liquidity

You know what’s fun? Investing in really cool technology at the early stages.

You know what isn’t fun? Not being able to access money when you want.

In fact, this one simple word liquidity represents the #1 reason less than 1% of accredited investors are actually investing in private companies. Tying up money for 7–10 years just isn’t that appealing.

But what if companies could build their own, privately controlled markets with tokenized assets? Well, we are stealing our own thunder a bit now.

The most important thing a company needs to consider in tokenizing securities is controlled distribution.

We all want to have our cake and eat it, too. This is why Venture360 built controls into our tokenization platform, allowing companies to tokenize their securities. Issuers control the subsequent distribution of these tokens in privately controlled markets.”

We go into exactly how all of this works in later posts, and we are always open to suggestions about how you would build your own market.

At the beginning of this year we embarked on a quest to highlight those in the venture communities across the globe, who were influencing change. Being a software company that powers the global venture community, we know and understand the people on the ground doing deals and supporting companies as they grow aren’t necessarily the ones front and center in the press.

So, we reached out to local communities and asked them to nominate the Most Influential investors to showcase the unsung heroes of our industry. What we found surpassed even our expectations. Not only has the response been overwhelmingly positive, but we’ve also been able to get to know a lot more about our fellow investors.

This post highlights some of the things we’ve learned so far, and to let everyone know nominations close on May 1st, so there is still time to nominated your Most Influential investor here.

The Nominees

Our nominees so far have been worldwide with roughly 65% being based in the US, and the rest from around the globe. A special thanks to our team members that put in some early mornings and late nights to adjust for other time zones. After the United States, the United Kingdom came in second for volume of nominees, with the vast majority in and around London. Other notable clusters on the list include India, Germany, and Singapore.

Industries ranged FinTech to FemTech, number of funds from 1-8, and AUM between $20M and $525M. The overwhelming trend that we noticed was value-add. Almost every fund had taken this concept to a whole new level, whether it was marketing for high-end retail brands, or deep corporate connections into the logistics industry. One group maintains a job site to help attract talent for their portfolio companies, while another curates an invitation-only network for founders.

Enough about our observations, we’ll have plenty more to publish in the coming months. Let’s talk about the nominees and what we heard from them.

Industry Trends

We asked each nominee what industry trends will continue to develop over the coming years. What we didn’t expect was the wide variety of answers. Our nominees hail from all over the globe, with a wide variety of focus areas, but the answers varied even among similar geographies and investment profiles.

Automation and AI

While this covered a wide variety of areas, this is the clearest theme so far. One group looks at the sensors required to manage automation, from manufacturing equipment to mining vehicles. Another has several investments spanning the communication of connected devices, and the security around it. AI will help manage all of this information and continue to provide value over a wide variety of industries.

Corporate Partners

We saw a rise in corporate influence across the board. More major companies are launching internal funds to augment R&D and to solve internal problems. In addition, they are building more intentional relationships with VCs to help de-risk their future investments. To paraphrase one nominee, the low hanging fruit is gone, so the companies currently seeking capital require more specialized knowledge and access to resources that are much more difficult to acquire.

Founders as Investors

A sizable portion of the nominees had at least one founder on the team and a number were made up entirely of founders. According to many of them, this provided unique insight into identifying the right leadership teams and in offering much more specific expertise on operating the business. This fits with the deeper level of value-add that we observed as an overall trend.

In Conclusion

Launching the Most Influential List has been a fantastic experience so far and we couldn’t do it without your help, so thank you! We are continuing to accept nominations through May 1st so please send more influencers our way. We will continue to post updates as we narrow down the list, so keep an eye out. Lastly, this is about the community, so we welcome all thoughts and feedback on what we’re doing well and what we can improve.

https://blog.venture360.co/wp-content/uploads/2018/05/i-influencer.png250250Chris Cooleyhttp://34.228.74.189/wp-content/uploads/2017/11/venture360-full-gray1.pngChris Cooley2018-05-07 19:13:502018-05-07 19:29:23Observations from the Most Influential

Venture360’s platform helps thousands of investors all over the world to track the performance of their portfolios.

The equity in private companies isn’t currently traded on an open market (more on that later), so here are the most common metrics investors on Venture360 are using to track and understand overall company performance.

#1 Cash on Hand

Cash is king and how much is left can mean the difference between life and death for a start-up. Savvy investors want to stay on top of this in order to prepare to make some tough decisions on whether to reinvest, start cutting overhead, or cut losses.

#2 Full Time Employees

This is #2 for 2 reasons. First, how many employees is an indication of how much overhead there is to support, and second it is an indicator of growth. If a company is hiring, that is a great thing!

#3 EBITDA

Earnings before interest, taxes, depreciation and amortization. In other words, how much did the company make before the accountants wave their magic wands? This metric is focused on profitability, which is important for the long term viability of the business.

#4 Investment to Date

Investors want to keep a close watch on how much capital has been raised because it’s directly tied to cash flow. Opening a new round? They want to be the first to know.

#5 Gross Revenue

How much has the company sold? According to CB insights, the top reason for failure is building a product that the market didn’t want (42% of the time). The market votes with their dollars.

#6 Net Burn Rate

Every investor understands a company may be losing money now to make money later. That pile of cash recently invested in the last round is evaporating each month, and quick math will tell you how long before it’s gone, which is known as the “Runway.”

#7 Email Subscribers

Subscribers to an email list are a good litmus test of interest in a product or service, and whether it’s growing or contracting can be a sign of how the market feels. This can also be a vanity metric – one that seems to tell a good story but can either be masking a problem or completely manipulated.

#8 New Customer Acquisitions

This is more important as a trend than as a standalone number. As a company grows, it should get better at acquiring new customers. New features are released, the marketing budget grows, and the sales process gets better. All this hard work should be reflected in an upward trend.

#9 Total Paying Customers

Paying customers are important, they show traction and should also be considered as a trend. Keeping a close eye on this metric helps investors understand if they need to be concerned or if the company has it squarely under control.

#10 Contribution Margin

Contribution Margin is a product’s price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. Is the company making money on what it is selling? This number should also go up over time with added efficiencies to the business.

Reporting can be time consuming, which takes people away from their core business. But investors need transparency, particularly when things aren’t going well. The best thing that a company and investor can do is to agree with the reporting requirements up front, which sets the expectations going forward. Venture360 helps founders spend less time preparing their metrics and gives investors a simple way to keep track of their companies.

The more important question is why do you want to issue electronic shares? Before we jump to an answer, let’s take a quick walk through the history of stock certificates.

The oldest known stock certificate dates back to 1606, they were originally required to allow transfers while still providing proof of ownership, and were often necessary to receive dividends. As times changed, proof of ownership was transferred to companies over the actual owner, or bearer, of the stock. And as technology has improved, the regulatory bodies have increasingly looked to streamline this process. In the public markets, paper certificates are all but extinct.

Private markets are much more decentralized, so the move to streamline any type of operation is much slower. Some companies still issue paper shares, and some investors still ask for them. These are being replaced by electronic shares, but that too is unnecessary.

You can use something as simple as a spreadsheet to track your shares but probably shouldn’t.

Before we talk about the pros and cons, we should first outline the types of shares. Paper shares fall within a category called certificated shares. These are the standard share issued and require that a certificate, whether it it paper or electronic, can be issued.

Uncertificated shares only require that a ledger is maintained, no actual certificates ever have to be issued. In order to do this, companies simply add a provision to their bylaws authorizing uncertificated shares. While the specifics vary by state, most businesses are incorporated in Delaware for its favorable business regulations. You can find more information here and here.

A spreadsheet is free and can be fairly simple when you’re getting started but it does have a number of limitations. First, there is no system of record, meaning that anyone with a copy of it can make changes and there is no formal way to track which one is the ultimate truth. Your attorney, your accountant, your investors and several employees will likely all have a copy. When there are discrepancies, how do you resolve them?

The cost of a spreadsheet is hidden in the risks.

At the end of the day, your ledger is just a record of transactions. Those transactions occurred for specific reasons, such as closing a round of investment. Future investment rounds, awarding employee options, or increasing the value of your company would trigger changes but they could also be connected to other systems and automated. In addition, the ideal system should provide transparency to all parties.

At Venture360, we’ve put a lot of thought into this process. We built our platform to simplify the investment life-cycle, helping manage the relationship from the initial introduction, to reporting after future rounds have been raised. Your Cap Table (capitalization table) is just a record of the process for all parties, so you can stop worrying about what you forgot to put in that spreadsheet and get back to building your business.

Last week Aaron Harris over at Y Combinator wrote about bad terms and the types of things to look out for when you don’t always know what you’re getting into. We wanted to reference that post from our blog because we thought it was an important topic for the entrepreneurs that utilize our platform and reference our site. In a perfect world the investors would want an agreement to be fair in order to produce not only a friendly relationship, but also a fruitful one. Sometimes the terms can create situations that make it difficult for the entrepreneur to remain agile as they grow their business and since growing their business is beneficial for the investor, the terms should keep that as the primary target.

Aaron talked about some real stinker terms to be on the lookout for like Anti-dilution, Super pro-rata, 1x+ liquidation preferences, etc. But as he noted, the list can go on and on. The best bet is to find a lawyer that can guide you through these and how they may impact the company now and down the road. If anything, you just want to understand them.

“Get a lawyer that understands startups. It’s important to find someone with experience. Not only can a good lawyer explain what’s going on with terms of your agreement, he/she can tell you if those terms are standard. Lawyers can also help you negotiate, though this is usually more relevant in priced rounds.”

In many cases, the investors themselves may not even need those particular terms. They may have been advised to include them but if you were to discuss it with them as to the impact to the company, an investor may see the folly if such structure is built into the deal.

Aaron also pointed out that an investor who habitually inserts bad terms can find themselves ignored by the community on future opportunities because of the negative outcome that results from continually forcing such constraints on companies. Other investors in the same deal may even pressure that investor to drop the term because of it’s detriment to everyone involved.

Overall, Aaron’s piece gives great perspective and guidance on how to assess and move forward with caution. Which can be in short supply in a lot of deals these days.

Some of the terms that Aaron recommends to look out for but not limited to are…

Jump to Aaron Harris’s full post here to get a much more in-depth analysis. And if you are an entreprenuer looking to interface with your investors and potentially find new ones, sign up for a free company profile here at Venture360.

http://34.228.74.189/wp-content/uploads/2017/11/venture360-full-gray1.png00theventure360http://34.228.74.189/wp-content/uploads/2017/11/venture360-full-gray1.pngtheventure3602016-03-24 20:36:392016-03-24 20:36:39Industry Talk: Less Than Good Terms